Fine Whine | By Achim Griesel
Recently the Pew Charitable Trust published an article about consumers, big banks and overdrafts on the American Banker website. Over the years, the Pew Charitable Trust has devoted a considerable amount of time to analyzing checking accounts. Some of the recommendations from their studies, like its proposed disclosure, seem valid. Others, like the analysis of the overdraft service, are less so. Reading the article inspired Haberfeld Associates to think of ways to determine the need for more regulations on overdrafts, other than the consumer advocates on the one side and some industry based organization on the other side. Would the CFPB’s complaint database allow us some unique insights?
Before analyzing the CFPB’s complaint database, we asked if this is true representation of the consumer sentiment when it comes to overdraft services. Asking for a “complaint” – a negative – will only result in negative feedback. If there are, as the database shows, 8,094 instances of people complaining about issues caused by “funds in my account being low,” how many positive comments would the CFPB have received if it had asked for only compliments for the last four years?
The Pew article states that the examination of the CFPB’s consumer complaint database validates a need to reform overdraft policies and fees. The article specifically states that one in four “bank account or service” complaints is related to overdrafts. Yet when we downloaded data from the CFPB database, we found a few interesting facts (see sidebar, top right).
In my estimation there are about 1.3 billion overdraft occurrences a year, so somewhere around 5 billion occurrences in the lifetime of the complaint database. With that in mind, 8,094 complaints tagged as “Problems caused by my funds being low” represents a complaint ratio of 0.00015 percent. Seen this way, the statistics do not seem to validate Pew’s conclusion that more overdraft regulation is needed. That said, let’s explore some issues specifically mentioned in regard to overdrafts in the article.
The article surmises that “the burden is not evenly distributed by age, income and race.”
My company has analyzed millions of actual checking accounts at community banks over the last decade. That research shows that in most cases people make an informed and even rational decision regarding the use and expense of the overdraft option. It may not seem rational to the majority of customers, who have no overdrafts in a typical year, but it is rational and there is considerable evidence to support that claim.
If it supposedly is true that the overdraft services are more frequently used by certain age or race groups, what would the result be if financial institutions did not offer that service and declined transactions that would cause an overdraft? Would the headline say, “Younger customers as well as certain race segments experience more transaction declines”?
We have analyzed “high users” of overdraft services, those overdrawing an average of more than twice per months. This “high user” of overdraft services on average deposits nearly 30 percent more dollars than the average customer into their checking account each month. The remaining 28 percent of all customers that utilize the service utilize it at a lower level. This coincided with their deposit behavior as well. The deposit amounts in their accounts are lower and therefore they decide to utilize the service less frequently.
There are two conclusions from the Pew Charitable Trust article with which I agree. Clear disclosure (similar to the sample referred to at the beginning of this article) is helpful and should always be encouraged, maybe even standardized. Providing other short-term liquidity solutions as options is another recommendation I could not agree with more. Offering choices and clear disclosure should lead to consumers being able to choose the best option for their individual needs. Regulated pricing, on the other hand, will never get us to the best solution for the customer.■
Achim Griesel is chief operating officer at Haberfeld Associates. Haberfeld provides consulting, marketing and training services for community FIs and gains its unique data and benchmarks through analyses of millions of consumer banking records at community banks across the country.